Insurance Industry Should Protect Itself From BYOB Schemers

It’s impossible for a financial columnist to please all of the readers all of the time. My recent column criticizing the Be Your Own Banker scheme drew the ire of several fans of whole life insurance. Two of them in particular, in a letter to the editor and a guest editorial published in the Rapid City Journal, disparaged my integrity, my professional qualifications, and my math skills.

Part of the problem is that these readers interpreted my warning about BYOB, which I called “one step from being a scam,” as an attack on whole life insurance in general. That was not the case.

Admittedly, I’m not a fan of whole life as an investment. The purpose of life insurance, in my view, is not to provide retirement income or cash value, but to replace income when someone dies. For most people, the best and cheapest way to do this is through term life insurance. Obviously, someone who sells insurance will have a different opinion.

The insurance agent who tried to show that my math didn’t add up accused me of misrepresenting a Modified Endowment Contract (MEC). He wrote that no insurance professional using what he called the “banking concept” would ever sell an MEC. He’s right about that.

An MEC is a classification under 1988 federal tax law that is intended to limit the use of life insurance policies as tax-advantaged investments. If the cumulative premium payments exceed certain amounts, the IRS defines a policy as an MEC. This means withdrawals from the cash value are taxed as ordinary income and subject to a penalty.

What the BYOB salespeople promote are “blended whole life” policies. These combine term and whole life in order to keep the policies from qualifying as MEC’s. The calculations presented in my article were actual numbers taken from a blended whole life policy sold by a BYOB promoter, so of course they didn’t add up when viewed through the lens of an MEC.

Is a blended whole life policy ever a worthwhile option? Like any insurance products, there are certain situations where they make perfect sense when they are represented honestly and transparently.

However, anyone considering such a policy needs to know two things. First, insurance agents are compensated by commissions on the products they sell. They have no fiduciary responsibility to act in the best interests of their customers.

Second, whole life insurance pays some of the highest commissions of any financial product on the planet. The typical commission ranges from 50% to 70% of the first year’s premium.

With commissions like this, it’s easy to see how insurance agents might feel challenged by any criticism of whole life insurance. As a fee-only financial planner, if I discover that a particular type of whole life insurance isn’t good for consumers, that’s simply useful information to pass on to my clients. The same discovery for a commissioned insurance agent, however, is a potential threat to that agent’s livelihood.

Even with these tempting commission rates, there are many legitimate life insurance professionals whose intent is to serve customers rather than exploit them. These honest agents do their best to sell products they believe will promote consumers’ financial well-being. Comparing whole life insurance sold by reputable agents to the schemes pushed by BYOB sellers is like comparing apples and rotten apples.

It’s too bad that more insurance professionals are not stepping up to protect their industry from the rotten applies engaged in this type of shady marketing. Numerous honest life insurance salespeople would agree that the BYOB spin is not only harmful to consumers. It is also hurting the life insurance industry as a whole.